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Post loss/profit announcement drift

Journal

Journal of Accounting and Economics

Subject

Accounting

Authors / Editors

Balakrishnan K;Bartov E;Faurel L

Publication Year

2010

Abstract

We document a market failure to fully respond to loss/profit quarterly announcements. The annualized post portfolio formation return spread between two portfolios formed on extreme losses and extreme profits is approximately 21 percent. This loss/profit anomaly is incremental to previously documented accounting-related anomalies, and is robust to alternative risk adjustments, distress risk, firm size, short sales constraints, transaction costs, and sample periods. In an effort to explain this finding, we show that this mispricing is related to differences between conditional and unconditional probabilities of losses/profits, as if stock prices do not fully reflect conditional probabilities in a timely fashion.

Keywords

Loss/profit mispricing; Loss/profit predictability; Accounting losses/profits; Post-earnings-announcement drift; Earnings-based anomalies

Available on ECCH

No


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